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Whitepaper: Proposed Quality of Financial Advice Rating System

Editorial 31 Jul 2018


Adviser Ratings proposes a new rating system for the rapidly growing network of 1,800 financial advice licensees. This rating system will discriminate across advice providers based on quality and risk, enhancing the clarity and consistency of information used by consumers in selecting a financial adviser. This initiative follows consultation with government, regulators and industry and is backed by a government grant. The ratings methodology is described in a white paper released today for industry feedback.   

Read the whitepaper by Professor Jerry Parwarda, here.

“The destruction of trust in the financial advice industry is deeply concerning”, said Adviser Ratings CEO Wealth Mark Hoven. “Our mission is to increase the penetration of advice amongst consumers, yet the trend is strongly reversed. Today’s announcement of a new rating system for licensees is intended to differentiate the better service providers and rebuild community faith in our industry.” 

Adviser Ratings proposes two types of ratings: the first placed on all licensees using publicly available or commercially procured data, and the second incorporating proprietary and qualitative information gleaned directly from the licensee.

In the wake of the Royal Commission findings into advice and with a myriad of new reforms seeking to clean up the industry, consumers are facing an overwhelming amount of information to process during the decision-making process to select an adviser.

“The loss of confidence in institutional brands and the broader advice system demands this kind of evidence-based, scientifically validated service,” said Hoven. “We believe a summary indicator of adviser quality like a licensee rating based on a consistent and transparent methodology would vastly improve the way customers search for and track the ongoing status of financial advice providers.”

The white paper was authored by Jerry Parwada, a Professor of Finance at University of New South Wales (UNSW) Business School. This proposal represents the culmination of extensive consultations led by Parwada and Adviser Ratings’ senior management with industry, government and regulatory bodies.

“The focal point of our methodology is to predict actions within a licensee that are detrimental to client’s interests”, said Parwada. “Chief amongst these are instances of misconduct. At stake is the threat to retail customers’ willingness to access financial planning services. Recent studies show that even indirect exposure to misconduct destroys trust and results in non-participation. A key differentiator of the proposed rating methodology is that it will be backed up by a standing research capability designed to stress test the factors predicted to influence quality of advice as well as keep track of changing dynamics in the industry.”

Adviser Ratings has entered an agreement with the Capital Markets Cooperative Research Centre (CMCRC), supported by the Government of Australia through the Cooperative Research Centres (CRC) Program and by the Office of Science and Research of the NSW Government’s Trade & Investment Department. A longer-term partnership is anticipated for full commercialisation.

Beyond consumers, these ratings are expected to benefit a broad industry audience. “With adviser movement at 33% annualised since the Royal Commission advice hearings, their thirst for deeper insight about licensees, both their incumbent and prospective, has never been greater,” said Hoven. “Equally, licensees seeking to benchmark internally and differentiate in market should find value in the rating as a comparable measure of quality and risk management.” Licensee ratings could also impact the pricing of professional indemnity insurance and funding terms by financiers, and the due diligence performed by industry super funds building affiliated advice networks.

“Ultimately, we are seeking to assess if licensees are creating and nurturing a culture and operating environment that allows financial advisers to deliver high-quality professional advice in the best interests of their customers” said Hoven.

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